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1. The CEO of a highly profitable company, noticing that the excess cash not needed to fund business operations has accumulated in a company bank account that pays no interest, contemplates declaring and paying a cash dividend to common shareholders before year’s end. The likely effect of paying the dividend would be to
A. have no effect on ROI because dividends are paid out of retained earnings.
B. decrease ROI because the investment in the business would decrease while income would be unchanged.
C. increase ROI because all shareholders prefer dividends to capital gains.
D. increase ROI because the investment in the business would decrease while income would be unchanged.
E. cannot be determined from the information given because paying a dividend decreases profit and investment.

(For question #10 and #11)
Initial Investment —– $280,000
Annual cash recepits —– $196,000
Life of the project —– 6 years
Annual cash expenses —– $78,000
Salvage Value —– $28,000

10. Shufflebarger Inc. has provided the above data to be used in evaluating a proposed investment project.

The company’s tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 16%.

When computing the net present value of the project, what is the annual amount of the depreciation tax shield? In other words, by how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken?
A. $16,800
B. $39,200
C. $14,000
D. $32,667

11. Shufflebarger Inc. has provided the above data to be used in evaluating a proposed investment project.

The company’s tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 16%.

When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?
A. $28,000
B. $8,400
C. $19,600
D. $0

12. You have just turned 60 and an endowment insurance policy has paid you a lump sum of $200,000. If you invest the sum at 5%, how much money can you withdraw from your account in equal amounts each year so that at the end of 15 years (age 75) there will be nothing left?
A. $17,342
B. $9,268
C. $19,268
D. $15,415
E. $2,075,932

30. Your brother has offered to give you $100, starting next year, and after that growing at 3% for the next 20 years. You would like to calculate the value of this offer by calculating how much money you would need to deposit in the local bank so that the account will generate the same cash flows as he is offering you. Your local bank will guarantee a 6% annual interest rate so long as you have money in the account.

a. How much money will you need to deposit into the account today?
b. Using an Excel spreadsheet, show explicitly that you can deposit this amount of money into the account, and every year withdraw what your brother has promised, leaving the account with nothing after the last withdrawal.

31. You have decided to buy perpetuity. The bond makes one payment at the end of every year forever and has an interest rate of 5%. If you initially put $1000 into the bond, what is the payment every year?

Mary and Joe would like to save up $10,000 by the end of 3 years from now to buy new furniture for their home. They currently have $1,500. in a saving account set aside for the furniture. They would lide to make 3 equal year end deposit to this savings account to pay for the furniture when they purchase it three years from now assuming that this account pay 6% interest how much should the year end payment be.

Do in 2 steps
step 1 Future Value of a lump sum-equation A-1
step 2 Future Value of an ordinary annuity (Solve the PMT-also known as A) rearrange A-2

Question 24
Mr. Jones plans to deposit $500 at the end of each month for 10 years at 12% annual interest, compounded monthly. The amount that will be available in two years is
a. $13,000
b. $13,500
c. $14,000
d. $14,500

Question 25
At what rate of annual interest will an investment quadruple itself in 12 years?
a. 10.1%
b. 11.2%
c. 12.2%
d. 13.1%

Question 26
An individual contributes $200 per month to a 401(k) retirement account. The account earns interest at a nominal annual interest rate of 8%, with interest being credited monthly. What is the value of the account after 35 years?

a. $368,000
b. $414,000
c. $447,000
d. $459,000

Question 27
An investment proposal calls for a $100,000 payment now and a second $100,000 payment 10 years from now. The investment is for a project with a perpetual life. The effective annual interest rate is 6%. What is the approximate capitalized present cost?

a. $156,000
b. $160,000
c. $200,000
d. $267,000

Question 28
The construction of a volleyball court for the employees of a highly successful mid-sized publishing company in California is expected to cost $1200 and have annual maintenance costs of $300. At an effective annual interest rate of 5%, what is the project’s capitalized cost?
a. $1500
b. $2700
c. $7200
d. $18000

Question 29
Depreciation allowance is best defined as

a. the amount used to recover the cost of an asset so that a replacement can be purchased.
b. the amount awarded to industries involved in removing natural limited resources from the earth.
c. a factor whose use is regulated by federal law.
d. the value that a buyer will give a machine’s owner at the end of the machine’s useful life.

Question 30
An investment currently costs $28,000. If the current inflation rate is 6% and the effective annual return on investment is 10%, approximately how long will it take for the investment’s future value to reach $40,000?

a. 1.8 years
b. 2.3 years
c. 2.6 years
d. 3.4 years

Question 31
What is the approximate depreciation allowance for a $2500 item in the first year? Use MACRS depreciation assuming a 10-year life.

a. $193
b. $210
c. $230
d. $250

Using the appropriate interest table, answer each of the following questions. (Each case is independent of the others.)

(a) What is the future value of $7,000 at the end of 5 periods at 8% compounded interest?
(b) What is the present value of $7,000 due 8 periods hence, discounted at 11%?
(c) What is the future value of 15 periodic payments of $7,000 each made at the end of each period and compounded at 10%?
(d) What is the present value of $7,000 to be received at the end of each of 20 periods, discounted at 5% compound interest?

1. A company has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers. The collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.

(a) If the company has $5 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up?

(b) How much can the company earn in dollars per year on short-term investments made possible by the freed-up cash?

2. Swartz and Sons pays a 12 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 10 percent. The bonds are currently callable at $1,060. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds. This is the normal definition we use.

(a) Find the theoretical market value of the bonds using semiannual analysis.

(b) Do you think the bonds will sell for the price you arrived at in part (a)? Why?

3. Larry Smith calls his broker to inquire about purchasing a bond. His broker quotes a price of $1,180. Larry is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 14 percent interest, and it has 25 years remaining until maturity. The current yield to maturity on similar bonds is 12 percent. Compute the new price of the bond and comment on whether you think it is overpriced in the marketplace.

4. Audrey Wright has just retired after 25 years after teaching high school. Her total pension funds have an accumulated value of $180,000, and her life expectancy is 15 more years. Her pension fund manager assumes she can earn a 9 percent return on her assets. What will be her yearly annuity for the next 15 years?